Understanding the Price Mechanism

What is the primary role of the price mechanism in a free market economy?

• To regulate taxes

• To control inflation

• To create government policies

• To allocate resources

Which of the following is NOT a function of prices in a market economy?

• Subsidizing

• Incentivising

• Signalling

• Rationing

What happens to prices when resources become particularly scarce?

• Prices decrease

• Prices fluctuate randomly

• Prices remain constant

• Prices increase

In the signalling function of prices, what might producers do if prices rise?

• Exit the market

• Enter the market

• Ignore the price change

• Decrease production

According to the law of demand, what do consumers do when prices rise?

• Demand remains unchanged

• Demand less

• Demand fluctuates

• Demand more

What is the effect of a short-term increase in demand on supply according to the incentive function?

• Excess supply is created

• Supply is unaffected

• Supply decreases

• Supply remains constant

What does the signalling function of prices provide to consumers and producers?

• Legal advice

• Tax benefits

• Market information

• Subsidies

What is the result of producers responding to higher prices in the market?

• Supply becomes unstable

• No change in supply

• Increase in supply

• Decrease in supply

Which of the following is an example of a scarce resource leading to high prices?

• Sand

• Air

• Gold

• Water

What motivates a producer to increase production according to the incentivising function?

• Government intervention

• Potential for higher revenue

• Increased costs

• Decreased demand